Do Bonds Go in Taxable?

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PFInterest
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Do Bonds Go in Taxable?

Post by PFInterest » Sat Sep 29, 2018 3:53 pm

Ok, this argument continues to pop up, and I feel like a crazy person to keep telling people to not put bonds in their Roth IRA or taxable account when they don't have to.

So I turn to the number crunchers to debunk my way of thinking.

So the scenario:
In this day and age (2018), MFJ, 24% marginal or up, +/- state tax (don't think it matters), AA 80:20, 20-30 years till retirement, with this breakdown of accounts:
- 50% traditional (401k)
- 40% Roth IRA
- 10% taxable

Does the fixed income portion (think total bond) go in taxable, traditional, Roth or some combination?

Why or why not?

My vote: it squarely goes in the traditional accounts at this time. No need for munis, and none in my Roth IRA.
Last edited by PFInterest on Sat Sep 29, 2018 4:05 pm, edited 1 time in total.

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MN-Investor
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Re: Do Bonds Go in Taxable?

Post by MN-Investor » Sat Sep 29, 2018 4:02 pm

I'm trying to figure out the whole where to put bonds and where to put stocks myself.

My thought is that, in retirement, you need cash and bonds in taxable accounts to cover expenses for 1 or 5 or 10 years, depending on your comfort level. In other words, you don't want to sell stocks during a down market.

Otherwise, bonds - which grow more slowly than stocks - go in a tax-deferred retirement account. That minimizes your RMDs in future years.

Stocks are great to have in a taxable account, as long as you don't have to sell them in a down market. Having stocks in a taxable account allows you to be taxed at long term capital gains rates if you have gains, and allows you to do tax loss harvesting if you have stock losses.
The key to success - Save early, save often, invest well.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sat Sep 29, 2018 4:07 pm

MN-Investor wrote:
Sat Sep 29, 2018 4:02 pm
My thought is that, in retirement, you need cash and bonds in taxable accounts to cover expenses for 1 or 5 or 10 years, depending on your comfort level. In other words, you don't want to sell stocks during a down market.

Otherwise, bonds - which grow more slowly than stocks - go in a tax-deferred retirement account. That minimizes your RMDs in future years.

Stocks are great to have in a taxable account, as long as you don't have to sell them in a down market. Having stocks in a taxable account allows you to be taxed at long term capital gains rates if you have gains, and allows you to do tax loss harvesting if you have stock losses.
- in retirement, you can pull from a multitude of accounts so i dont think you need X years expenses in taxable necessarily.
- yes you get LTCG for large stock positions in taxable.

thanks for the response.

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eye.surgeon
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Re: Do Bonds Go in Taxable?

Post by eye.surgeon » Sat Sep 29, 2018 4:23 pm

Good article from forum member whitecoatinvestor...

https://www.whitecoatinvestor.com/asset ... n-taxable/

Summary is bonds in taxable may be the right choice for many here..
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

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JoMoney
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Re: Do Bonds Go in Taxable?

Post by JoMoney » Sat Sep 29, 2018 4:26 pm

If you use US Savings Bonds, it's extra tax deferred space ;)
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MN-Investor
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Re: Do Bonds Go in Taxable?

Post by MN-Investor » Sat Sep 29, 2018 4:31 pm

PFInterest wrote:
Sat Sep 29, 2018 4:07 pm

- in retirement, you can pull from a multitude of accounts so i dont think you need X years expenses in taxable necessarily.
What do you mean by a multitude of accounts? I don't want to touch my Roth IRAs, and I'm 5 years away from RMDs, so that leaves taxable accounts to pay for living expenses. My taxable accounts have cash, bonds, and stocks. If my stocks are up, then yes, I can sell and use that money. But if stocks have cratered, then that leaves my cash and bonds in taxable accounts to live off of.
The key to success - Save early, save often, invest well.

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Re: Do Bonds Go in Taxable?

Post by RickBoglehead » Sat Sep 29, 2018 4:32 pm

My mother has zero retirement accounts. She holds bonds in taxable.

I choose to maximize my investment in Primecap, $25k per year per person per account type. So I have Primecap in my ROTH accounts. 90% of my retirement is in ROTH. To hit my bond target of 35%, I hold bonds in ROTH and in my taxable account. I also hold Primecap in my taxable accounts.

Sometimes what you want to do for one reason (tax efficiency) is overruled by AA or desired return.

HEDGEFUNDIE
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Re: Do Bonds Go in Taxable?

Post by HEDGEFUNDIE » Sat Sep 29, 2018 4:33 pm

eye.surgeon wrote:
Sat Sep 29, 2018 4:23 pm
Good article from forum member whitecoatinvestor...

https://www.whitecoatinvestor.com/asset ... n-taxable/

Summary is bonds in taxable may be the right choice for many here..
To be specific that article claims bonds are better in taxable when they are muni bonds. Which is not contrarian advice.

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White Coat Investor
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Re: Do Bonds Go in Taxable?

Post by White Coat Investor » Sat Sep 29, 2018 4:44 pm

PFInterest wrote:
Sat Sep 29, 2018 3:53 pm
Ok, this argument continues to pop up, and I feel like a crazy person to keep telling people to not put bonds in their Roth IRA or taxable account when they don't have to.

So I turn to the number crunchers to debunk my way of thinking.

So the scenario:
In this day and age (2018), MFJ, 24% marginal or up, +/- state tax (don't think it matters), AA 80:20, 20-30 years till retirement, with this breakdown of accounts:
- 50% traditional (401k)
- 40% Roth IRA
- 10% taxable

Does the fixed income portion (think total bond) go in taxable, traditional, Roth or some combination?

Why or why not?

My vote: it squarely goes in the traditional accounts at this time. No need for munis, and none in my Roth IRA.
It varies, it's complex, and it depends on factors that cannot yet be known. You're weighing tax efficiency against the benefit of a larger tax protected to taxable ratio. We do know the things that make it more likely to go in taxable:

Low interest rates
Planning to spend all money (rather than leave to charity or to heirs)
Don't give much to charity during life
High taxable to tax protected ratio
High need for asset protection

I don't even know the right answer for me, but I have bonds in both tax-protected (TIPS and G fund) and taxable (intermediate muni fund). I suspect in my case it doesn't matter all that much.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

aristotelian
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Re: Do Bonds Go in Taxable?

Post by aristotelian » Sat Sep 29, 2018 4:50 pm

I would just follow the typical tax efficient allocation advice unless for some reason you feel your situation is unique. Generally, the argument is for bonds in pretax a) to limit the growth of pretax accounts so that your growth will be tax free or taxed at LTCG rates rather than subject to RMD's at your marginal rate, and b) dividends in taxable would be taxed at your marginal rate.

https://www.bogleheads.org/wiki/Tax-eff ... _placement


I have a small bond position in my brokerage account just for the convenience of a stable source of liquidity if I ever need it, but the core of my bond allocation is in the pretax employer plan.

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BuyAndHoldOn
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Re: Do Bonds Go in Taxable?

Post by BuyAndHoldOn » Sat Sep 29, 2018 5:05 pm

I put 100% of my bonds in taxable so that they are accessible. I am in the 22% Tax Bracket (5% state), and I see the yields of Total Bond, treasuries (depending on maturity), and similar Munis (e.g., the MUB ETF) being comparable after taxes. So I invest in both taxable (like Treasuries) and non-taxable bonds for diversification purposes.

Note that Treasuries get a state tax deduction in most (all?) states. I am surprised when I see people reccomend a 1-year CD at a lower yield that a 1-year treasury, but logistics of setting up the CD may make the decision make sense. (I prefer the liquidity of treasuries).

But if I was going to hold A LOT of bonds - whatever that amount would be - I would think more about putting them in taxable. Because of the taxes on all that interest. But even then, it would depends on the tax bracket I was in and my timeframe for wanting to use the money etc.

marcopolo
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Re: Do Bonds Go in Taxable?

Post by marcopolo » Sat Sep 29, 2018 5:06 pm

MN-Investor wrote:
Sat Sep 29, 2018 4:02 pm
I'm trying to figure out the whole where to put bonds and where to put stocks myself.

My thought is that, in retirement, you need cash and bonds in taxable accounts to cover expenses for 1 or 5 or 10 years, depending on your comfort level. In other words, you don't want to sell stocks during a down market.

Otherwise, bonds - which grow more slowly than stocks - go in a tax-deferred retirement account. That minimizes your RMDs in future years.

Stocks are great to have in a taxable account, as long as you don't have to sell them in a down market. Having stocks in a taxable account allows you to be taxed at long term capital gains rates if you have gains, and allows you to do tax loss harvesting if you have stock losses.
There are different reason to favor bonds in taxable vs tax-deferred (see WCI post), but this is not a reason that needs to affect the decision.
If you decide that bonds in tax-deferred makes the most sense in your situation, that does not force you to sell stocks in a down market.

When it comes time to sell in down market, and you want to sell bonds, instead of stocks, you simply sell the stocks in your taxable account AND sell an equal amount of bonds in your tax-deferred account, and use that money to purchase the same/similar stock in the tax-deferred account. By doing this you have effectively withdrawn the money from bonds, without "selling low" from your stock position. If it is a severe down turn, you may also get the advantage of Tax-loss harvesting (if stock purchased in tax-deferred is not "substantially equivalent').
Once in a while you get shown the light, in the strangest of places if you look at it right.

marcopolo
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Re: Do Bonds Go in Taxable?

Post by marcopolo » Sat Sep 29, 2018 5:09 pm

BuyAndHoldOn wrote:
Sat Sep 29, 2018 5:05 pm
I put 100% of my bonds in taxable so that they are accessible.
This should not really be a concern. See my post above.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Taylor Larimore
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General rules for fund placement.

Post by Taylor Larimore » Sat Sep 29, 2018 8:46 pm

Bogleheads:

General rule for fund placement (stocks and bonds):
Try to put your most tax-inefficient securities into your tax-advantaged account(s). Put what's left into your taxable account(s).

Note: Try to use only tax-efficient funds that can be held 'forever' in your taxable account (switching or selling securities in a taxable account can trigger capital-gain taxes).

General rule for IRA placement:
If you think your tax-rate will be lower in retirement use a Traditional IRA. If you think your tax-rate will be higher in retirement use a Roth IRA.

If you don't mind wading through complex advice, our Wiki provides good in-depth information.

Tax-Efficient Fund Placement

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

billthecat
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Re: Do Bonds Go in Taxable?

Post by billthecat » Sat Sep 29, 2018 9:33 pm

I continue to struggle with this but based on these assumptions:

Code: Select all

			CA	US	Taxable
Bond fund		VCADX	VWIUX	VBTLX
Bond yield		2.70%	2.87%	2.69%
Bond return		2.70%	2.87%	2.69%
Stock (SCHB) yield	1.59%	1.59%	1.59%
Stock return		5%	5%	5%
Bond dividend tax rate	0%	11.3%	50.1%
LTCG, qualified div
tax rate		30.1%	30.1%	30.1%
it seems that CA tax exempt in a taxable account is best, for me. I considered CA tax exempt, US tax exempt, and taxable, all in a taxable account, and finally taxable bonds in a tax-sheltered account. The math is tricky, though. To estimate the future LTCG, I use a future value of a growing annuity but I don't know if I did it right. Bond return = bond yield because I'm assuming "all the bond return is dividends."

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sat Sep 29, 2018 9:39 pm

billthecat wrote:
Sat Sep 29, 2018 9:33 pm
I continue to struggle with this but based on these assumptions:

Code: Select all

			CA	US	Taxable
Bond fund		VCADX	VWIUX	VBTLX
Bond yield		2.70%	2.87%	2.69%
Bond return		2.70%	2.87%	2.69%
Stock (SCHB) yield	1.59%	1.59%	1.59%
Stock return		5%	5%	5%
Bond dividend tax rate	0%	11.3%	50.1%
LTCG, qualified div
tax rate		30.1%	30.1%	30.1%
it seems that CA tax exempt in a taxable account is best, for me. I considered CA tax exempt, US tax exempt, and taxable, all in a taxable account, and finally taxable bonds in a tax-sheltered account. The math is tricky, though. To estimate the future LTCG, I use a future value of a growing annuity but I don't know if I did it right. Bond return = bond yield because I'm assuming "all the bond return is dividends."
Thank you for data.
I didn't specify CA but good to know.

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Re: Do Bonds Go in Taxable?

Post by Call_Me_Op » Sun Sep 30, 2018 7:10 am

Because the asset location issue is quite nuanced (including such considerations as asset protection and effects of fund turn-over and rebalancing), I simply hold balanced portfolios in both tax-advantaged and taxable accounts. I just make sure that any highly tax-inefficient assets (like real estate funds and high-yield corporate bonds) are held in tax-advantaged.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Do Bonds Go in Taxable?

Post by welderwannabe » Sun Sep 30, 2018 7:19 am

BuyAndHoldOn wrote:
Sat Sep 29, 2018 5:05 pm
Note that Treasuries get a state tax deduction in most (all?) states. I am surprised when I see people reccomend a 1-year CD at a lower yield that a 1-year treasury, but logistics of setting up the CD may make the decision make sense. (I prefer the liquidity of treasuries).
All states.

Also must remember that Treasury interest inside of a traditional 401k is taxed at the state level when it is taken out of the 401k...because withdrawals out of a 401k are taxed as ordinary income and no distinction is made as to the source of the income within the 401k.

If tax rate pre and post retirement will be the same or close, which with the current tax rates is more possible than ever, that would make a larger case to hold Treasuries within taxable and not inside of a 401k...especially at around the 22% federal tax rate with a 5-10% state income tax rate (munis don't make a lot of sense at the 22% rate).
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

MikeG62
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Re: Do Bonds Go in Taxable?

Post by MikeG62 » Sun Sep 30, 2018 8:22 am

Another thread on this topic (including the podcast I referenced) for your consideration OP:

viewtopic.php?f=1&t=258000&p=4099947&hi ... s#p4099947
Real Knowledge Comes Only From Experience

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sun Sep 30, 2018 10:47 am

MikeG62 wrote:
Sun Sep 30, 2018 8:22 am
Another thread on this topic (including the podcast I referenced) for your consideration OP:

viewtopic.php?f=1&t=258000&p=4099947&hi ... s#p4099947
yes i was trying to give a specific example.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sun Sep 30, 2018 10:55 am

eye.surgeon wrote:
Sat Sep 29, 2018 4:23 pm
Good article from forum member whitecoatinvestor...

https://www.whitecoatinvestor.com/asset ... n-taxable/

Summary is bonds in taxable may be the right choice for many here..
yes that article is 4 years old and only deals with taxable vs rIRA.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sun Sep 30, 2018 10:56 am

White Coat Investor wrote:
Sat Sep 29, 2018 4:44 pm
PFInterest wrote:
Sat Sep 29, 2018 3:53 pm
Ok, this argument continues to pop up, and I feel like a crazy person to keep telling people to not put bonds in their Roth IRA or taxable account when they don't have to.

So I turn to the number crunchers to debunk my way of thinking.

So the scenario:
In this day and age (2018), MFJ, 24% marginal or up, +/- state tax (don't think it matters), AA 80:20, 20-30 years till retirement, with this breakdown of accounts:
- 50% traditional (401k)
- 40% Roth IRA
- 10% taxable

Does the fixed income portion (think total bond) go in taxable, traditional, Roth or some combination?

Why or why not?

My vote: it squarely goes in the traditional accounts at this time. No need for munis, and none in my Roth IRA.
It varies, it's complex, and it depends on factors that cannot yet be known. You're weighing tax efficiency against the benefit of a larger tax protected to taxable ratio. We do know the things that make it more likely to go in taxable:

Low interest rates
Planning to spend all money (rather than leave to charity or to heirs)
Don't give much to charity during life
High taxable to tax protected ratio
High need for asset protection

I don't even know the right answer for me, but I have bonds in both tax-protected (TIPS and G fund) and taxable (intermediate muni fund). I suspect in my case it doesn't matter all that much.
So in this case it sounds like I can continue my current advice.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sun Sep 30, 2018 10:56 am

RickBoglehead wrote:
Sat Sep 29, 2018 4:32 pm
My mother has zero retirement accounts. She holds bonds in taxable.

I choose to maximize my investment in Primecap, $25k per year per person per account type. So I have Primecap in my ROTH accounts. 90% of my retirement is in ROTH. To hit my bond target of 35%, I hold bonds in ROTH and in my taxable account. I also hold Primecap in my taxable accounts.

Sometimes what you want to do for one reason (tax efficiency) is overruled by AA or desired return.
yes this was not the case i was presenting.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sun Sep 30, 2018 10:57 am

MN-Investor wrote:
Sat Sep 29, 2018 4:31 pm
PFInterest wrote:
Sat Sep 29, 2018 4:07 pm

- in retirement, you can pull from a multitude of accounts so i dont think you need X years expenses in taxable necessarily.
What do you mean by a multitude of accounts? I don't want to touch my Roth IRAs, and I'm 5 years away from RMDs, so that leaves taxable accounts to pay for living expenses. My taxable accounts have cash, bonds, and stocks. If my stocks are up, then yes, I can sell and use that money. But if stocks have cratered, then that leaves my cash and bonds in taxable accounts to live off of.
you can pull from your employer accounts prior to RMDs. you can pull from rIRA as well although its not advisable. one could also start a SPIA.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sun Sep 30, 2018 10:59 am

BuyAndHoldOn wrote:
Sat Sep 29, 2018 5:05 pm
I put 100% of my bonds in taxable so that they are accessible. I am in the 22% Tax Bracket (5% state), and I see the yields of Total Bond, treasuries (depending on maturity), and similar Munis (e.g., the MUB ETF) being comparable after taxes. So I invest in both taxable (like Treasuries) and non-taxable bonds for diversification purposes.

Note that Treasuries get a state tax deduction in most (all?) states. I am surprised when I see people reccomend a 1-year CD at a lower yield that a 1-year treasury, but logistics of setting up the CD may make the decision make sense. (I prefer the liquidity of treasuries).

But if I was going to hold A LOT of bonds - whatever that amount would be - I would think more about putting them in taxable. Because of the taxes on all that interest. But even then, it would depends on the tax bracket I was in and my timeframe for wanting to use the money etc.
ok, but can you show why that is beneficial in your scenario? it sounds like you could change the tax drag.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Sun Sep 30, 2018 11:00 am

Call_Me_Op wrote:
Sun Sep 30, 2018 7:10 am
Because the asset location issue is quite nuanced (including such considerations as asset protection and effects of fund turn-over and rebalancing), I simply hold balanced portfolios in both tax-advantaged and taxable accounts. I just make sure that any highly tax-inefficient assets (like real estate funds and high-yield corporate bonds) are held in tax-advantaged.
yes i was trying to minimize the nuance by providing guidance. the goal is to avoid this hedging gestalt to make an educated decision.

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unclescrooge
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Re: Do Bonds Go in Taxable?

Post by unclescrooge » Sun Sep 30, 2018 11:03 am

MN-Investor wrote:
Sat Sep 29, 2018 4:31 pm
PFInterest wrote:
Sat Sep 29, 2018 4:07 pm

- in retirement, you can pull from a multitude of accounts so i dont think you need X years expenses in taxable necessarily.
What do you mean by a multitude of accounts? I don't want to touch my Roth IRAs, and I'm 5 years away from RMDs, so that leaves taxable accounts to pay for living expenses. My taxable accounts have cash, bonds, and stocks. If my stocks are up, then yes, I can sell and use that money. But if stocks have cratered, then that leaves my cash and bonds in taxable accounts to live off of.
You can still sell bonds in tax deferred accounts.

Just because the government isn't forcing you to take a distribution doesn't mean you can't take one if you need it.

That will also lower your RMDs in the future.

MNGopher
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Re: Do Bonds Go in Taxable?

Post by MNGopher » Sun Sep 30, 2018 11:27 am

I go 80/20 Roth, 70/30 taxable, 65/35 in deferred (this is a target date fund and will adjust toward bonds).
Overall it's about 70/30 stock/bond.
I want some safety in taxable because I will spend some of that first, when I retire pre-59.5.
I take the most risk in Roth because I will spend that last.

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Re: Do Bonds Go in Taxable?

Post by OregonDucksFan » Sun Sep 30, 2018 12:52 pm

If after-tax taxable bond fund's yield is greater than municipal bond fund's yield:
1. Use taxable bond fund in 401k or traditional IRA.
2. If bond allocation can't all fit in 401k or traditional IRA or if you must put bond funds in taxable account, then use taxable bond fund.

If after-tax taxable fond fund's yield is less than municipal bond fund's yield,
1. use municipal bond fund in taxable account.
2. If bond allocation can't all fit in taxable account, then use taxable bond fund (not municipal bond fund) in 401k, traditional IRA, and roth IRA in that order.

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eye.surgeon
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Re: Do Bonds Go in Taxable?

Post by eye.surgeon » Sun Sep 30, 2018 11:18 pm

PFInterest wrote:
Sun Sep 30, 2018 10:55 am
eye.surgeon wrote:
Sat Sep 29, 2018 4:23 pm
Good article from forum member whitecoatinvestor...

https://www.whitecoatinvestor.com/asset ... n-taxable/

Summary is bonds in taxable may be the right choice for many here..
yes that article is 4 years old and only deals with taxable vs rIRA.
Maybe you'd prefer our own wiki...

https://www.bogleheads.org/wiki/Tax-eff ... _placement

The advantages for holding bonds in a taxable account include:

1. Bonds have a lower expected return than stocks, and hence sometimes a lower tax cost.
2. Switching placement when necessary does not incur a large capital gains tax. If you hold stocks in a taxable account instead, large built-up unrealized capital gains makes it very difficult to switch even if switching would otherwise be beneficial.
3. Nominal treasury bonds, TIPS, and in-state muni bonds are not subject to the state income tax.
4. The effective tax rate on muni bonds is usually much lower than the highest marginal tax rate on ordinary income.
5. Interest from muni bonds is not included in Adjusted Gross Income (AGI), which determines eligibility for many income tax deductions and credits, whereas dividends and capital gains are included in AGI.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett

rkhusky
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Re: Do Bonds Go in Taxable?

Post by rkhusky » Mon Oct 01, 2018 6:55 am

I keep most bonds in tax-deferred because I will pay income tax rates on all withdrawals. I keep mostly stocks in taxable because I plan to pay 0% on all gains of withdrawals. I keep mostly high expected return stocks in Roth because I will pay 0% on all withdrawals. I plan to convert most tax-deferred to tax-exempt before age 70.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Mon Oct 01, 2018 8:06 am

rkhusky wrote:
Mon Oct 01, 2018 6:55 am
I keep most bonds in tax-deferred because I will pay income tax rates on all withdrawals. I keep mostly stocks in taxable because I plan to pay 0% on all gains of withdrawals. I keep mostly high expected return stocks in Roth because I will pay 0% on all withdrawals. I plan to convert most tax-deferred to tax-exempt before age 70.
Sounds like a great plan.

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UpsetRaptor
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Re: Do Bonds Go in Taxable?

Post by UpsetRaptor » Mon Oct 01, 2018 8:57 am

About a year ago I ran the math for my situation, using reasonable assumptions, for various scenarios into the future. Bonds in tax-advantaged space did end up coming out ahead in the more likely scenarios, though for the most part it was a bunch of meh. Bonds in 401k vs Roth IRA was also a bunch of meh, with the only real difference being RMDs, if the RMD rules happen to be the same in 20+ years when I retire. So with a poor 401k bond option, my bonds are in my Roth IRA and I have zero concerns with that, though I'm probably in the minority here in that regard.

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Re: Do Bonds Go in Taxable?

Post by JW-Retired » Mon Oct 01, 2018 9:25 am

A large portion of our bonds (~85%) are in tax deferred accounts. The rest is a small amount of my state's munis in taxable.

I really don't get any taxable bonds in taxable argument? :shock:
JW
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bhsince87
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Re: Do Bonds Go in Taxable?

Post by bhsince87 » Mon Oct 01, 2018 10:21 am

I've been loading up out taxable accounts with short term, taxable bonds and CD's over the past few years.

I'm a few months/years from early retirement around age 54-55, and I'm setting up the "bond tent" strategy.

Also, it looks like we will be trying to stay under the ACA subsidy cliff.

Bonds help us here by giving much more predictable cash flow, lower income, and the advantage of selling and treating the proceeds as mostly return of capital.
Retirement: When you reach a point where you have enough. Or when you've had enough.

billthecat
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Re: Do Bonds Go in Taxable?

Post by billthecat » Mon Oct 01, 2018 10:31 am

rkhusky wrote:
Mon Oct 01, 2018 6:55 am
I keep most bonds in tax-deferred because I will pay income tax rates on all withdrawals. I keep mostly stocks in taxable because I plan to pay 0% on all gains of withdrawals. I keep mostly high expected return stocks in Roth because I will pay 0% on all withdrawals. I plan to convert most tax-deferred to tax-exempt before age 70.
But as White Coat Investor points out, your tax-deferred is really a Roth plus a government account. So by limiting your growth to limit the taxes paid, you area also limiting the growth for your portion.

Here's what I do (or plan):

Tax-advantaged accounts (traditional/Roth, 401/IRA/HSA/whatever)
- US stocks

Taxable accounts
- US stocks
- International stocks
- Municipal bonds (planned)
- Cash/MM
Last edited by billthecat on Wed Oct 10, 2018 8:29 pm, edited 1 time in total.

PFInterest
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Re: Do Bonds Go in Taxable?

Post by PFInterest » Mon Oct 01, 2018 10:34 am

UpsetRaptor wrote:
Mon Oct 01, 2018 8:57 am
About a year ago I ran the math for my situation, using reasonable assumptions, for various scenarios into the future. Bonds in tax-advantaged space did end up coming out ahead in the more likely scenarios, though for the most part it was a bunch of meh. Bonds in 401k vs Roth IRA was also a bunch of meh, with the only real difference being RMDs, if the RMD rules happen to be the same in 20+ years when I retire. So with a poor 401k bond option, my bonds are in my Roth IRA and I have zero concerns with that, though I'm probably in the minority here in that regard.
interesting. did you compare the rIRA to taxable outcome?

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Re: Do Bonds Go in Taxable?

Post by PFInterest » Mon Oct 01, 2018 10:34 am

JW-Retired wrote:
Mon Oct 01, 2018 9:25 am
A large portion of our bonds (~85%) are in tax deferred accounts. The rest is a small amount of my state's munis in taxable.

I really don't get any taxable bonds in taxable argument? :shock:
JW
yes that was the crux of this whole issue. i am amazed so many people asset that bonds in taxable is a fine move for higher earners when they have space remaining in workplace retirement plans.

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Re: Do Bonds Go in Taxable?

Post by PFInterest » Mon Oct 01, 2018 10:35 am

bhsince87 wrote:
Mon Oct 01, 2018 10:21 am
I've been loading up out taxable accounts with short term, taxable bonds and CD's over the past few years.

I'm a few months/years from early retirement around age 54-55, and I'm setting up the "bond tent" strategy.

Also, it looks like we will be trying to stay under the ACA subsidy cliff.

Bonds help us here by giving much more predictable cash flow, lower income, and the advantage of selling and treating the proceeds as mostly return of capital.
so are your pretax retirement accounts also full of FI? or is your tent purely in taxable?

billthecat
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Re: Do Bonds Go in Taxable?

Post by billthecat » Mon Oct 01, 2018 10:35 am

JW-Retired wrote:
Mon Oct 01, 2018 9:25 am
A large portion of our bonds (~85%) are in tax deferred accounts. The rest is a small amount of my state's munis in taxable.

I really don't get any taxable bonds in taxable argument? :shock:
JW
The taxes on bond dividends are higher but the growth is greater for stocks. So depending on the circumstances (including your own marginal tax rates) it may be better to have bonds (US & Fed tax free, Fed tax free, or taxable, depending) in a taxable account than in a tax-advantaged account.

Basically, it's not enough to only consider taxes; you have to also consider growth.

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Re: Do Bonds Go in Taxable?

Post by bhsince87 » Mon Oct 01, 2018 11:44 am

PFInterest wrote:
Mon Oct 01, 2018 10:35 am
bhsince87 wrote:
Mon Oct 01, 2018 10:21 am
I've been loading up out taxable accounts with short term, taxable bonds and CD's over the past few years.

I'm a few months/years from early retirement around age 54-55, and I'm setting up the "bond tent" strategy.
No
Also, it looks like we will be trying to stay under the ACA subsidy cliff.

Bonds help us here by giving much more predictable cash flow, lower income, and the advantage of selling and treating the proceeds as mostly return of capital.
so are your pretax retirement accounts also full of FI? or is your tent purely in taxable?
It's mixed. Pretaxed account is about 55 stock/45 bond. Taxable is about 70/30. That 30 is about 10 years of living expenses.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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UpsetRaptor
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Re: Do Bonds Go in Taxable?

Post by UpsetRaptor » Mon Oct 01, 2018 1:16 pm

PFInterest wrote:
Mon Oct 01, 2018 10:34 am
UpsetRaptor wrote:
Mon Oct 01, 2018 8:57 am
About a year ago I ran the math for my situation, using reasonable assumptions, for various scenarios into the future. Bonds in tax-advantaged space did end up coming out ahead in the more likely scenarios, though for the most part it was a bunch of meh. Bonds in 401k vs Roth IRA was also a bunch of meh, with the only real difference being RMDs, if the RMD rules happen to be the same in 20+ years when I retire. So with a poor 401k bond option, my bonds are in my Roth IRA and I have zero concerns with that, though I'm probably in the minority here in that regard.
interesting. did you compare the rIRA to taxable outcome?
All other things being equal (which granted they're often not), tIRA vs Roth IRA theoretically doesn't matter for bond placement, if you're re-adjusting to your AA as you go along, and incorporating the tax deferred aspect of the tIRA into your AA calculations. Here's a good explanation:
https://www.whitecoatinvestor.com/what- ... friday-qa/

Also, here's another, somewhat mathy, discussion of bonds in taxable vs IRA from this forum that may be useful:
viewtopic.php?f=10&t=234117&start=50

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Ketawa
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Re: Do Bonds Go in Taxable?

Post by Ketawa » Mon Oct 01, 2018 2:11 pm

This is something I used to say in many threads, including some of the threads linked in this thread. There are some nuances to this decision that get lost, especially in the way examples are constructed to make the "bonds in taxable" argument. One important nuance is that assets are more risky if they are held in a Roth, tax-free account instead a Traditional, tax-deferred account or a taxable account. I see that the WCI blog post actually addresses this, which is great!

With a Roth account, you keep all the gains or losses.

With a Traditional account, the government shares in your gains or losses. You keep (1 - your marginal tax rate for withdrawals in the future)% of the gains or losses, on the margin. The volatility of assets is dampened and they are less risky.

Similarly, with a taxable account (simplifying), you keep the 85% of the gains for equities, or deduct some of the losses from ordinary income. Again, the volatility of assets in a taxable account is dampened.

So, any example which takes a stock/bond portfolio and switches the locations without adjusting for this change in risk is not very illuminating. Almost all of these examples assume a good outcome (e.g. 8% returns) for stocks. If they assume a good outcome for stocks without looking at the potential downside, it's no more illuminating than comparing a 100/0 portfolio to an 80/20 portfolio and saying the 100/0 portfolio is better.

It is a very complicated decision. I am inclined to say that the annual tax cost is the most important variable. The tax cost for munis should be the difference in expected returns between munis and similar taxable bonds. An example that looks at stocks and bonds, merely switches their location, and makes conclusions based on that analysis is flawed.

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Re: Do Bonds Go in Taxable?

Post by l1am » Mon Oct 01, 2018 3:32 pm

For me personally, I consider my taxable account/s to be liquid investments. i.e. I may wish to withdraw from that account due to various life circumstances over the years (pay off mortgage, future child's college etc.). So I don't even consider it a "retirement" account, even though I'd hope a decent portion of it will be.

Therefore, I don't want the extreme potential volatility of 100% stocks in that account. Right now I'm working on reducing that via muni bonds (and possibly some CDs but haven't decided). If I had a taxable account that was purely destined for retirement only, then ye it would probably make more sense to hold bonds in the tax deferred.

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Re: Do Bonds Go in Taxable?

Post by Taylor Larimore » Mon Oct 01, 2018 5:19 pm

Bogleheads:

My decision to normally place taxable bonds in tax-deferred accounts is based primarily on a study by William Reichenstein, Ph.D., CFA; and William Meyer published in the Journal of Financial Planning.
This paper concludes by indicating that except in rare cases, investors should hold stocks in taxable accounts and bonds in retirement accounts.
The Asset Location Decision Revisited

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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tfb
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Re: Do Bonds Go in Taxable?

Post by tfb » Mon Oct 01, 2018 6:33 pm

PFInterest wrote:
Sat Sep 29, 2018 3:53 pm
So the scenario:
In this day and age (2018), MFJ, 24% marginal or up, +/- state tax (don't think it matters), AA 80:20, 20-30 years till retirement, with this breakdown of accounts:
- 50% traditional (401k)
- 40% Roth IRA
- 10% taxable
When you have only 10% of the portfolio in taxable, where bonds go just doesn't matter much in the overall cost. If there's a difference in tax cost, it affects at most 10% of your portfolio. When you do 80:20 across the board, only 2% of your portfolio in bonds ends up in taxable. If that's so terrible, it's only terrible for 2% of your portfolio. More explanation in my blog post:

When Tax Efficient Asset Placement Doesn’t Make Much Difference
Harry Sit, taking a break from the forums.

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Re: Do Bonds Go in Taxable?

Post by MotoTrojan » Mon Oct 01, 2018 6:50 pm

UpsetRaptor wrote:
Mon Oct 01, 2018 1:16 pm

All other things being equal (which granted they're often not), tIRA vs Roth IRA theoretically doesn't matter for bond placement, if you're re-adjusting to your AA as you go along, and incorporating the tax deferred aspect of the tIRA into your AA calculations. Here's a good explanation:
https://www.whitecoatinvestor.com/what- ... friday-qa/

Also, here's another, somewhat mathy, discussion of bonds in taxable vs IRA from this forum that may be useful:
viewtopic.php?f=10&t=234117&start=50
What about RMDs? Bonds will grow less, thus less RMDs/taxes.

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Re: Do Bonds Go in Taxable?

Post by PFInterest » Mon Oct 01, 2018 6:54 pm

Taylor Larimore wrote:
Mon Oct 01, 2018 5:19 pm
Bogleheads:

My decision to normally place taxable bonds in tax-deferred accounts is based primarily on a study by William Reichenstein, Ph.D., CFA; and William Meyer published in the Journal of Financial Planning.
This paper concludes by indicating that except in rare cases, investors should hold stocks in taxable accounts and bonds in retirement accounts.
The Asset Location Decision Revisited

Best wishes.
Taylor
Thank you for some evidence Taylor. Exactly what I was looking for.

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Re: Do Bonds Go in Taxable?

Post by grabiner » Mon Oct 01, 2018 7:25 pm

eye.surgeon wrote:
Sat Sep 29, 2018 4:23 pm
Good article from forum member whitecoatinvestor...

https://www.whitecoatinvestor.com/asset ... n-taxable/

Summary is bonds in taxable may be the right choice for many here..
Taylor Larimore wrote:
Mon Oct 01, 2018 5:19 pm
My decision to normally place taxable bonds in tax-deferred accounts is based primarily on a study by William Reichenstein, Ph.D., CFA; and William Meyer published in the Journal of Financial Planning.

This paper concludes by indicating that except in rare cases, investors should hold stocks in taxable accounts and bonds in retirement accounts.

The Asset Location Decision Revisited
The difference between these two articles is the yield on the bonds. Since the tax cost on stocks is close to constant, the advantage of tax-deferring bonds is greater when the tax cost is higher, either in the actual cost on taxable bonds, or the implicit cost in the difference between muni and taxable yields for bonds of the same risk.

White Coat Investor used the current rates as of 2014, when munis yielded 2.16% and taxable bonds yielded 2.69%, for a 0.53% cost of holding taxable munis. Reichenstein assumed a 5% yield on taxable bonds with a 30% tax rate, implying that munis of comparable risk yielded at most 3.5%, and the tax cost was 1.50%. The current yields are 2.70% on Vanguard Intermediate-Term Tax-Exempt and 3.23% on Vanguard Total Bond Market Index Admiral shares, which matches White Coat Investor's 0.53% tax cost; however, that would give the same yield at a 16% tax rate, which suggests that investors consider the muni fund somewhat riskier. (My usual rule of thumb is that munis have the same yield as taxable bonds of comparable risk at a 25% tax rate; if you change that to 22% because of the new tax law, the tax-equivalent yield of Intermediate-Term Tax-Exempt would be 3.46%, close to the 3.43% of Vanguard Intermediate-Term Bond Index).

My own estimate, in When to prefer low-rate bonds to stocks in taxable, is that the break-even point at a 15% tax on qualified dividends is when muni yields (or after-tax yields on taxable bonds) and stock yields are equal. With munis currently yielding 2.70% and Total Stock Market Admiral shares yielding 1.80%, you can redo my computations and find a slight advantage for bonds in tax-deferred.

However, note the "at a 15% tax rate". I still recommend munis if you pay 0% tax on munis and 23.8% tax on qualified dividends (top tax bracket, or phase-out of the child tax credit), or 24.3% (moderate tax bracket plus 9.3% CA state tax and you use munis from CA). Munis do not gain much of an advantage if you are in a moderate tax bracket and there is no low-cost muni fund for your state, so that you pay 8% tax on munis and 23% tax on qualified dividends.
Wiki David Grabiner

billthecat
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Re: Do Bonds Go in Taxable?

Post by billthecat » Mon Oct 01, 2018 10:35 pm

grabiner wrote:
Mon Oct 01, 2018 7:25 pm
eye.surgeon wrote:
Sat Sep 29, 2018 4:23 pm
Good article from forum member whitecoatinvestor...

https://www.whitecoatinvestor.com/asset ... n-taxable/

Summary is bonds in taxable may be the right choice for many here..
Taylor Larimore wrote:
Mon Oct 01, 2018 5:19 pm
My decision to normally place taxable bonds in tax-deferred accounts is based primarily on a study by William Reichenstein, Ph.D., CFA; and William Meyer published in the Journal of Financial Planning.

This paper concludes by indicating that except in rare cases, investors should hold stocks in taxable accounts and bonds in retirement accounts.

The Asset Location Decision Revisited
The difference between these two articles is the yield on the bonds. Since the tax cost on stocks is close to constant, the advantage of tax-deferring bonds is greater when the tax cost is higher, either in the actual cost on taxable bonds, or the implicit cost in the difference between muni and taxable yields for bonds of the same risk.

White Coat Investor used the current rates as of 2014, when munis yielded 2.16% and taxable bonds yielded 2.69%, for a 0.53% cost of holding taxable munis. Reichenstein assumed a 5% yield on taxable bonds with a 30% tax rate, implying that munis of comparable risk yielded at most 3.5%, and the tax cost was 1.50%. The current yields are 2.70% on Vanguard Intermediate-Term Tax-Exempt and 3.23% on Vanguard Total Bond Market Index Admiral shares, which matches White Coat Investor's 0.53% tax cost; however, that would give the same yield at a 16% tax rate, which suggests that investors consider the muni fund somewhat riskier. (My usual rule of thumb is that munis have the same yield as taxable bonds of comparable risk at a 25% tax rate; if you change that to 22% because of the new tax law, the tax-equivalent yield of Intermediate-Term Tax-Exempt would be 3.46%, close to the 3.43% of Vanguard Intermediate-Term Bond Index).

My own estimate, in When to prefer low-rate bonds to stocks in taxable, is that the break-even point at a 15% tax on qualified dividends is when muni yields (or after-tax yields on taxable bonds) and stock yields are equal. With munis currently yielding 2.70% and Total Stock Market Admiral shares yielding 1.80%, you can redo my computations and find a slight advantage for bonds in tax-deferred.

However, note the "at a 15% tax rate". I still recommend munis if you pay 0% tax on munis and 23.8% tax on qualified dividends (top tax bracket, or phase-out of the child tax credit), or 24.3% (moderate tax bracket plus 9.3% CA state tax and you use munis from CA). Munis do not gain much of an advantage if you are in a moderate tax bracket and there is no low-cost muni fund for your state, so that you pay 8% tax on munis and 23% tax on qualified dividends.
Having looked at this and your linked comment, and the comment on international funds too, I find the whole thing exasperating and may yet go back to using the Schwab robo, and a target date in my 401k, and just forget about it.
grabiner wrote:
Sun Jun 03, 2012 6:00 pm
if you have an unusually good bond option in the 401(k) such as the TSP G fund, then you should hold your bonds there. (The TSP G fund currently yields about 2% with the same risk as a money-market fund, so the effective tax cost for a government employee to hold bonds in taxable is 2%.)
I do have a good option in my 401K - Vanguard total bond, .03% ER. In fact, you can assume my 401K has good options for everything - US large (Vanguard .01 ER), US mid (Vanguard extended .04 ER), international (Vanguard total .06 ER), bonds, target date funds (.05 ER). There are some bad ones too but lots of low-cost options. But the vast majority of my assets are in taxable. And I'm in a high tax bracket, in CA, but won't be retiring in CA.

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